Non failed firms
This ratio looks at the relationship between current assets and current liabilities, sometimes called working capital ratio. It examines liquidity position. Current ratio should be ideally 2. 00 for any business. For Bellway PLC it’s very good and but it has decreased over the period of 2003 to 2004 from 3. 64 to 3. 49. This is only a slight decrease and may be explained by the increase in stock and current liability (as can be seen in the balance sheet of the annual report), but as the ratio is very high anyway, it would not be viewed as a problem as long as stability is maintained.
This ratio is in interest to managers, banks and suppliers, as it indicates the short-term financial stability of S ; N. All parties will consider this ratio when deciding whether or not to borrow and lend funds. Acid Test Ratio When using this ratio I have deducted the stock from the current assets because stock is the most illiquid asset, it’s the hardest to turn into cash without a loss in its value. To gain money out of its stock if it was to come to the worse may need to sell it cheaper to sell it all quickly, so stock is not as predictable in value.
An ideal result should be 1. 1, which means the company would have 1. 10 to every 1 of debt. And also would have a safety margin of 10p. Bellway PLC are 0. 45: 1 in 2003 and the same in 2004. This does not seem like a good result, but can be explained by the nature of the business. Bellway PLC are a house builder company, using a land buying policy, so the value of the land is expected to increase once built upon, this is the basis of the business, so this ratio would seem unrelated when considering this.
Average stock turnover This ratio measures the number of times in one year that Bellway PLC turns over its stock of goods for sale. From this we can also establish the average length of time in days that stock is held by Bellway PLC. This is the ratio I have used. In 2003 Bellway PLC held there stock for 423 days and in 2004 for 451 days. This seems a very long time for holding stock, but is explained by the nature of the business. Bellway PLC buy land and develops housing upon this land.
Thus a long time is taken in selling the original stock bought, but this stock is now been built upon, thus increasing the value hugely, This ratio does not represent Bellway PLC fairly and can only be considered if the nature of the business is understood. Average settlement period for debtors It’s important for Bellway PLC to know how long debtors are taking to settle their accounts. Good credit control should ensure that customers pay their bills on time but should a firm’s credit control slip, the length of time customers take to pay could start to increase over and above the companies agreed terms.
This can have important implications on the firm’s cash flow. In 2003 the debtor’s days is 13 and remained the same in 2004. This is a positive sign as the settlement period is very good, and stable. This ratio is in interest to the managers of Bellway PLC and their customers. The managers can use this ratio to determine the effectiveness of their credit control and to anticipate the likely timing of cash inflows. Customers would be interested in discovering whether or not Bellway PLC is effective at collecting their debts or if the credit period can be extended over the agreed terms.
Average settlement for creditors This ratio will tell us how many days Bellway PLC takes to pay its creditors. 2003 it took 133 days and in 200 it took 148 days. Bellway PLC should not be to concerned about keeping these days low like the debtors period, as the longer Bellway PLC take to pay its creditors the better it is for them, as they will have more money available to use to invest, etc. However Bellway PLC cannot afford to let the creditor payment period to extend too far or it will lose any trust that it has built up with suppliers.
While extended credit periods are a valuable source of short-term finance, the willingness of suppliers to offer credit terms should not be abused. Looking at Bellway PLC results form this ratio it seems they may be taking a while and may upset creditors, but when considering the nature of the business it seems understandable. The leading creditors are the land creditors (note 11 in “notes to accounts” of the annual reports), this is relative to the nature if the business in development, thus a long settlement period is expected.
This ratio is in interest to suppliers, as it allows a company to determine how good other businesses are at paying their suppliers on time. This is vital when deciding whether or not to offer credit, how much credit to offer and for how long, as long as the nature of the business is considered. Asset Turnover In 2003 for Bellway PLC it’s 0. 96: 1 and in 2004 it’s 0. 92: 1. So it has dropped slightly. Once again, when considering the nature of the business this result can seem misleading.
With average stock turn over period being high, you can expect this sought of result and considering the nature of the business I would say this is a positive result, as it shows good efficiency of assets. This is of interest to managers of Bellway PLC as it enables them to see how efficient the usage of assets under their control has been. It also indicates increase or decrease of efficiency for previous years. So as you can see for Bellway PLC there is a slight a decrease in efficiency form year 2003 to 2004, this may be related to the fact that the average stock turn over period has increased.
Multivariate Analysis This model was used by American Professor E. I Altman. In 1968 Altman took a sample of 33 failed and 33 non-failed American manufacturing companies. He than examined many ratios to see which ratios taken together best discriminate between companies in the two groups. In the absence of any well-developed theoretical models, which would explain why companies fail; he used a statistical technique known as multiple discriminate analyses, by which means he found five ratios which he used what is called a z score, the level of which best captured differences between the failed and non failed firms.